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  3. a. suppose the probability of a credit event is 5%

a. Suppose the probability of a credit event is 5%. Calculate the price of a...

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Finance

a. Suppose the probability of a credit event is 5%. Calculate the price of a credit default swap (CDS) that completely insures this bond.

b. Suppose the probability of a credit event increases. What would happen to the value of the CDS that completely insures this bond? State whether it will increase or decrease and then explain.

c. The bond holders are worried about the issuer of the bond (the borrowing company) taking a riskier project. What could be the ways to make the firms management to select less risky project? Give two examples and explain how they work.image

2. The following diagram represents the possible values of a bond in 1 year. The bond will be $100 if there is no problem and $20 if there is any credit event. The discount rate for this bond is 10%. $100 No Problem $20 Credit Event 2. The following diagram represents the possible values of a bond in 1 year. The bond will be $100 if there is no problem and $20 if there is any credit event. The discount rate for this bond is 10%. $100 No Problem $20 Credit Event

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